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Canadian 'Giants' Playing Out; Smaller Finds, Coalbed Gas Ahead

A five-fold increase in drilling discoveries will eventually be
needed if Canadian producers are to keep up with expanded markets
for their natural gas, according to a just-completed supply review
that comes virtually from the horse's mouth.

The tall order emerged from a review by the Canadian Gas
Potential Committee, which is largely composed of retired
regulatory and producing industry executives and senior
consultants. Before publication the results are submitted to peers
at E&ampP companies for cross-checking.

The committee - led by Roland Priddle, retired chairman of the
National Energy Board - stressed that its findings do not amount to
an alarmist warning that Canada is about to run short of gas.
Instead, the need for more drilling successes is a natural result
of historical and technical trends, reported consultant Robert
Meneley.

Aggressive marketers and expanding pipelines have expanded
outlets and demand for Canadian gas at the same time as the
production sector has begun to run out of big, easy finds.

In the modern western Canadian gas industry's first half-century
since the Second World War, 59% of production has come from early
bonanza discoveries of 341 giant "class 1" pools exceeding 53 Bcf
of reserves each and holding a total of nearly 84 Tcf of marketable
supplies. The committee's analysis of 82 gas-bearing geological
formations or "plays" suggests that only 120 such giants remain to
be discovered, will be tougher to find and and will yield just 16
Tcf.

To keep up with demand approaching or exceeding six Tcf per year
in the decades ahead, the committee says the Canadian industry will
have to turn to much smaller "class 3" pools. They have less than
11 Bcf of marketable gas each. There are so many of them that they
could yield about 46 Tcf of marketable reserves. But the class 3
finds are so small that it will take 190,000 discoveries to tap
their full potential.

The gas committee calculates it will take up to 5,000
discoveries of western Canadian gas pools per year to keep the
industry running at the accelerated pace hit in the late 1990s, a
pace expected to increase again in the early 2000s due to pipeline
expansions. Exports continue to drive the growth, with sales to the
United States that now nudge three Tcf per year due to jump again
to fill a TransCanada expansion and the expansion-extension of the
Foothills-Northern Border system that will add about 1.1 Bcf in
daily capacity this heating season then the 1.3-Bcf-per-day
Alliance Pipeline Project starting in late 2000.

Meneley, a veteran of 43 years in the industry, said "petroleum
companies will have to drill many more gas wells each year in
western Canada."

The gas potential committee's findings show the requirement for
increased activity is already being registered by drilling results.
While successes are still plentiful, they are becoming smaller.
Since the 1970s, when newly discovered gas pools averaged about
four Bcf of marketable reserves, the finds have tapered off in size
to about one Bcf each.

The committee makes no estimate of just how many more wells will
be required in the future. "There is not a one-to-one relationship
between numbers of wells and discoveries," Meneley said.

So far, Canadian production companies have consistently achieved
big bangs in gas results for their drilling bucks. Over the past 10
years, the western Canadian industry has achieved an annual average
of about 1,000 discoveries while drilling 500 gas-exploration
wells.

Meneley explained that new finds of gas pools are still often
made by development wells aiming only to extend known reserves, and
as an unintended byproduct of oil drilling. Canadian gas wells also
often achieve multiple discoveries by tapping several new pools
stacked at different depths in various geological layers.

Committee member Richard Procter, retired chief of the oil and
gas arm of the Geological Survey of Canada, said "this is not a
message that we're running out of gas. The message is, the industry
is changing." He said the changes should include tapping
astronomical reserves of gas in coal seams that carpet the Canadian
West - and sooner rather than later, in the interests of supply
security and Canada's reputation for reliability. The commitee
estimates the western Canadian coalbed methane total at 135-261
Tcf. The National Energy Board recognizes 8Tcf of coalbed methane
as economic under current prices and technology.

Procter said "one concern we have is that we don't see
sufficient activity in coalbed methane." A specialist in the field,
Ken Sinclair, observed that coal seams have been entered by about
10% of the 300,000 conventional wells drilled to date in western
Canada. Many are expected to yield coalbed methane if new
technology being developed by a consortium of companies and
government agencies is used. But the Canadian industry has only
spent about C$30 million (US$21 million) on research into coalbed
methane and produces none. Sinclair pointed out that in the United
States, where conventional gas supplies began dwindling long ago,
about $4 billion has been poured into coalbed methane and it
accounts for 8% of production.

Marketers and industry analysts, meanwhile, suggest the
committee's report confirms a happy outlook for prices for Canadian
gas. All the findings point to a tightening supply, especially as
the new pipeline capacity opens up. Soft oil prices are forecast to
contribute to tightening gas supplies by restricting revenues
available for switching drilling targets.

Producers and traders are betting heavily now on price increases
in the coming heating season. The Calgary investment house of
Peters &amp Co., a leading specialist in the energy sector,
observes that early fall has been marked by sharp increases in cash
gas prices in Alberta. Between Oct. 7 and Oct. 14, prices at the
AECO C trading hub jumped C$0.39 (US$0.27) per Mcf to C$2.80
(US$2).

The analysts say the Canadian price increases are being
generated by traders and producers taking advantage of an arbitrage
opportunity to buy now for storage, then sell at higher prices
expected to develop in the heating season. An estimated 25 Bcf of
storage capacity remained available as of mid-October.

Gordon Jaremko, Calgary

&COPY;Copyright 1998 Intelligence Press, Inc. All rights
reserved. The preceding news report may not be republished or
redistributed in whole or in part without prior written consent of
Intelligence Press, Inc.

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